The Phoenix medical office market is on fire. Strong investment activity in the first quarter has driven pricing to an all-time high of $373 per square foot, according to research from Colliers. Strong leasing activity supported the investment demand and the higher pricing. Rent rates increased more than 6% year-over-year and 3.1% quarter-over-quarter.
"Last year medical activity was paused early in the year, but as government issued closures of non-essential services were allowed to open activity picked up in the second half of the year," Phil Hernandez of Colliers' Phoenix office tells GlobeSt.com.
Population growth in the surrounding Phoenix markets is the primary driver of medical office growth. The largest transactions in the first quarter were in the Gateway Airport/Loop 202 market, Deer Valley/Airport and Chandler. "Demand is still very strong for medical space. The drivers have been the outward sprawl of the city, so the suburban cities like Gilbert, Chandler, Buckeye and Peoria had the most activity, and these areas have the most amount of new product under construction," says Hernandez. Medical talent and expanding medical programs at local universities is another driver of growth in the sector, according to the report.
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While the occupancy and rental rates both increased, net absorption decreased slightly. In the first quarter, absorption was -12,431 square feet in Phoenix, ending a run of five consecutive quarters of positive absorption. At the same time, new deals
increased by 4.1% over-the-quarter but the volume is still down 9.5% year-over-year. In addition, the Phoenix market underperforms compared to the national average. "Phoenix has higher vacancy than the national average of 8.6 percent, but historically Phoenix has hovered around the sub 15%," says Hernandez. At the end of the first quarter, the vacancy rate was 13.2%, 10 basis points lower than the same time a year earlier.
Despite some concerns in leasing activity, Hernandez has a optimistic outlook on the future of the market, expecting investment to demand to continue to gain momentum in step with population growth. "Phoenix was the number one city for population growth, and the rest of the metro is growing at a rapid pace," he says. "Medical space is in high demand, and with the new addition of Wexford building in Phoenix Biomedical Campus and the completion of Creighton University, Phoenix is an emerging to become a top life science market."
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Kelsi Maree Borland
